Equities: Bullish Small Caps

On September 13 we placed a bullish Spanish IBEX small cap equity view in our asset class strategy, upon the break of resistance at 4,000, and the index has already rallied 2.7% since then . We have long highlighted Spanish small caps as one of our preferred ways of playing the improving eurozone growth (particularly German demand) story ( see 'The Case For Periphery Over Emerging EU Stocks', June 20, and 'Regional Equity Strategy September 3), and the break through 4,000 is the technical signal that we were waiting for.

The next major technical resistance on the weekly chart comes in around 5,000, 30% up from current levels. Given relatively depressed valuations (the index is currently trading at a price-to-book ratio of 0.7), an improving export story and early signs that the region's banking sector may be past the worst, we see potential for a move back to this level over the next few months. A move back below 4,000, however, could prompt us to reassess our bullish view.

Long Way To Go
Spain - IBEX Small Caps Index

Equities: Bullish Small Caps

On September 13 we placed a bullish Spanish IBEX small cap equity view in our asset class strategy, upon the break of resistance at 4,000, and the index has already rallied 2.7% since then . We have long highlighted Spanish small caps as one of our preferred ways of playing the improving eurozone growth (particularly German demand) story ( see 'The Case For Periphery Over Emerging EU Stocks', June 20, and 'Regional Equity Strategy September 3), and the break through 4,000 is the technical signal that we were waiting for.

Long Way To Go
Spain - IBEX Small Caps Index

The next major technical resistance on the weekly chart comes in around 5,000, 30% up from current levels. Given relatively depressed valuations (the index is currently trading at a price-to-book ratio of 0.7), an improving export story and early signs that the region's banking sector may be past the worst, we see potential for a move back to this level over the next few months. A move back below 4,000, however, could prompt us to reassess our bullish view.

BMI EUROPE ASSET CLASS STRATEGY
DATE INITIATED ENTRY LEVEL GAIN/(LOSS) * RATIONALE
Source: BMI
CURRENCIES
NA
FIXED INCOME
Spain over Italy 5-Year CDS 31-Jul-2013 1bps 15bps Italy's political and fiscal position to deteriorate, chance of coalition collapse. Spain moving along improving trajectory, Rajoy government likely to survive.
EQUITY INDICES
Eurozone Over US Equities (Ratio of MSCI US to MSCI EMU) 15-Aug-2013 17.3 1.2% Though we still like the US, eurozone underperformance has reached extremes, and the eurozone economy is picking up momentum. The MSCI EMU looks attractive on a technical basis and is increasingly cheap versus the US. Targeting a move down in the US/EMU ratio to 14.0x.
Bullish ISEQ Index 13-Aug-2013 4,230 0.9% Successful EU/IMF bailout exit looking likely, Fine Gael/Labour Coalition comitted to austerity, improving consumer sentiment and growth outlook, reduced proportion of financials on index, house prices stabilising, strong technical picture.
Bullish Spanish Small Caps (IBEXS) 13-Sep-20103 4,000 2.7% Cheap valuations, competitiveness gains for Spanish economy and large composition of exporters mean Spanish small caps index is our preferred way playing an improving German domestic demand
MACRO/INDUSTRY STRATEGY
Bullish German Autos (Daimler) 15-Jul-2013 51.18 12.6% Expectation for strong H213 sales, ongoing cost reduction continuing to bearing fruit, and an attractive technical picture.
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